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Written by Greg Palacorolla, CFP®

There is a misconception that simply contributing to your company retirement plan is the solution to your eventual ability to retire. Obviously, it’s the first and an extremely integral part of attaining a comfortable life post-career. However, just making that contribution election on your payroll form and forgetting about the money is a colossal mistake that too many individuals make. Life is expensive when you are working with consistent income. It becomes even pricier and more difficult to make ends meet when that income stream stops. Therefore, it’s paramount that those dollars that you stashed away are indeed working for you and growing consistently over your career.

The combination of contributing the maximum that your financial situation will allow and the active, effective management of those dollars will ultimately lead to the achievement of your retirement goals.

Understanding Your Investment Options

401(k), 403(b), and TSP plans offer tremendous opportunities for individuals to save for retirement. Their contribution maximums trump IRA’s, the employer often provides a matching contribution, and the growth of the account is tax-deferred until the funds are withdrawn. However, the one drawback to these types of investment vehicles are the investment options provided. Mutual funds comprise the majority of retirement plans. Contrary to an IRA where you can invest in most of the mutual fund universe (approximately 8,000), retirement plans tend to limit the choices to twenty or less. That limitation alone makes investing your account much more difficult. Fund manager tenure, underlying fees, and historical performance are crucial and differentiating evaluation metrics when analyzing mutual funds. However, with such few options at your disposal, it handcuffs you, which can negatively impact your portfolio. Therefore, the lack of investment options makes your selections that much more important.

To maximize your growth, you need to invest in the best offerings, albeit if it’s simply choosing the best 3-5 funds out of the available 20 fund lineup. Certain funds will typically outperform the benchmarks and their peers over an extended period of time, so you need to determine which funds those are and invest your hard-earned retirement money in them.

To illustrate the impact that effective mutual fund selection can have on your portfolio, consider this. $100,000, earning 4% per year, will be worth $266,584 in 25 years. That same $100,000, earning 6% per year, will be worth $429,187 in 25 years. If you can achieve 1-2% more per year by successfully narrowing down your investment options, the impact in retirement is significant.

Understand How Your 401(K) Allocation Impacts Your Entire Portfolio

Another important consideration when managing your retirement plan is the impact that it has on your overall asset allocation. While this asset is often the largest in your portfolio, it is key that you tie all of your assets, both retirement and non-qualified, into your investment allocation. This will ensure that your portfolio matches your risk tolerance, time horizon, and projected retirement needs. For example, if you have $250,000 in your company 401(k) and $120,000 in a joint account with your spouse and each are managed independently of the other, the chances of your overall allocation falling outside your comfort zone will increase. Aggregating all assets is the best approach.

Let’s revisit the example from above. If you have $370,000 and have determined that you are a moderate, balanced type of investor, then your total allocation to stocks across BOTH accounts should be roughly 60-65% or $222,000 – $240,500. Since retirement assets are typically invested more aggressively because of their long-term nature, you may elect to invest 90% of your account ($225,000) in stocks. This allocation to equities would comprise 61% of your total portfolio and falls within your target of 60-65% in equities. If you were to also put 45% ($54,000) of your joint brokerage account into stocks, which many would consider conservative, then your overall allocation to equities would have exceeded your moderate profile and 75% of your total portfolio would be exposed to this riskier asset class.

Understand the Current Economic Environment

We are firm believers in long-term investing, recognizing that timing the market and day trading are far riskier to your financial well-being. However, we do believe that strategic asset allocation will result in the best long-term returns. This means understanding things like where the U.S. is currently at in the economic cycle, valuations of the stock market, and the impact that the Fed will have on interest rates. Aligning your portfolio with the current economic environment will safeguard you from unnecessary risk while boosting your longer term returns.

How Geier Asset Management Assists in the 401(k) Managing Process

As I’ve described above, consistent and active managing of your 401(k), 403(b), or TSP account is crucial to your retirement. Unfortunately, pension plans are becoming non-existent, which means your retirement plan is your primary source of income in retirement. You have a long life to live in retirement and it’s essential to have saved enough throughout your career to maintain the comfortable lifestyle you’ve become accustomed to living. While we encourage all clients to contribute as much to retirement vehicles as possible, we also equally emphasize the importance of managing it effectively. This means understanding how this account fits into your complete portfolio allocation, vetting the investment choices available, investing those dollars, and ongoing adjustment of the account to align with current market conditions. We offer to handle this for our clients, removing this burden from them. This takes time, but our experience has taught us that it’s the only successful method to effectively managing what is often your largest asset and your key to a comfortable retirement.

Learn more about our retirment planning services »


© Geier Asset Management, Inc. October 2015.  Greg Palacorolla is the Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor.  The above blog reflects the opinions of Mr. Palacorolla and not necessarily the firm. Any advice given is general in nature and investors must consider their own individual circumstances. Past performance is no indicator of future performance. The firm makes no warranties or representations of any kind relating to the accuracy or timeliness of the information provided.